By Allan Sloan
Tuesday, May 30, 2006
When baseball teams trade players, they often talk about how a transaction is a "win-win" for both teams -- which rarely proves to be the case. But here's a potential swap that really would be good -- financially, at least -- for both sides. I'm talking about Time Warner's proposed trade of the Atlanta Braves to Liberty Media, a holding company renowned for its dealmaking.
The companies would bring home total tax savings I estimate at $700 million -- far more than the Braves are worth. Sure, the rest of us taxpayers would be shut out. But what's baseball without a sacrifice play?
Most fans would call this long-pending transaction a "sale" of the Braves. But it would actually be a trade. To be specific, it's what tax techies call a "cash-rich split-off," a maneuver that's just gotten a big assist from President Bush's recently enacted $70 billion tax-cut legislation.
How does the Tax Increase Prevention and Reconciliation Act of 2005 involve the Braves? Here's the play-by-play. Time Warner would put the team (valued around $450 million) and about $1.35 billion of cash into a subsidiary. It would then trade that subsidiary for a Liberty unit that would be holding about $1.8 billion of the Time Warner stock that Liberty already owns. Neither side will pay any tax on its gains.
By the time the fat lady sings, Liberty would own the Braves and a dugout full of cash, and in return Time Warner would have received about 100 million of Liberty's 171 million Time Warner shares.
That sure looks like a sale, but not to tax lawyers. That's because the tax-cut legislation specifically makes cash-rich split-offs safe from the IRS. What's more, until May 17, 2007, a company can include up to $3 of cash for every dollar worth of businesses that it trades to another company in return for its own stock. After that, the ratio drops to 2-to-1. (You need to include a business in the deal to satisfy the rules.) This one-year window provides an incentive for Liberty to do a cash-rich split-off or two with News Corp. (in which it holds a 16 percent stake) by next May.
By the way, I can't find any indication that Time Warner or Liberty designated Washington hitters to stick that 3-to-1 provision into the tax bill. They seem to be merely taking advantage of the situation rather than reaping the benefits of something they helped create.
How much money are we talking about here? A lot. Were Time Warner to sell the Braves outright for $450 million, it would owe about $175 million of federal and state income taxes, by my estimate. (Turner Broadcasting, acquired by Time Warner in 1996, paid just $10 million for the Braves in 1976.) Thus, swapping the team for $450 million of its own stock is a lot better for Time Warner than merely selling it.
The deal also offers Liberty a great way to cash in most of its Time Warner stake, much of which dates to 1987. Were Liberty to make a conventional sale of $1.8 billion of its Time Warner stock, it would owe more than $500 million of taxes, by my estimate. Possibly much more.
I have to estimate because Time Warner wouldn't talk to me at all, and Liberty, which has publicly discussed a possible Braves deal, wouldn't talk numbers.
Greg Maffei, Liberty's chief executive, did tell me that Liberty has no intention of quickly flipping the Braves should his company end up with the team. "We would be long-term holders of any business we purchase from Time Warner, because that's the Liberty way," he said. Besides, disposing of the Braves too quickly would jeopardize Liberty's tax break, which its tax-averse controlling shareholder and chairman, John Malone, is most unlikely to do.
As things stand now, owning the Braves makes no obvious business sense for Liberty. But if it does a deal with News Corp., Liberty might end up owning the regional cable network that carries the Braves.
Robert Willens, Lehman Brothers' tax expert, predicts that cash-rich split-offs will soon line up at the plate because companies no longer have to worry about having the deals challenged by the IRS.
The first such deal, in 2003, saw the Janus mutual fund company score $900 million of cash and a $100 million business in return for $1 billion of DST Systems stock. Several less aggressive deals also went through, Willens says, but "there was this free-floating fear that the IRS would figure out some way to attack this, and a judge would go along with them." Now, that fear has struck out.
And get this. According to Congress's math, blessing cash-rich split-offs will generate $116 million of tax revenue over the next 10 years.
Believe that, and you believe that Barry Bonds broke Babe Ruth's home run record without any chemical assistance.
Sloan is Newsweek's Wall Street editor. His e-mail address firstname.lastname@example.org